Bankers on boards:: monitoring, conflicts of interest, and lender liability

Abstract

We investigate the trade-off between the benefits from bank monitoring when a banker is represented on a firm's board and the costs from two sources: conflicts of interests between lenders and shareholders, and U.S. legal doctrines that generate lender liability for bankers on boards of firms in financial distress. Consistent with high costs of active involvement, bankers are on boards of large, stable firms with high proportions of collateralizable assets and low reliance on short-term financing. While permitting banks to own equity could mitigate conflicts, the protection of shareholder versus creditor rights could continue to reduce the role of U.S. banks in corporate governance.